A Probabilistic Voting Model of Progressive Taxation with Incentive Effects

Abstract

This paper shows conditions under which a marginally progressive income tax emerges as the outcome of political competition between two parties, when labor is elastically supplied and candidates are uncertain about voters' choice at election day. Assuming the elasticity of labor is decreasing on marginal wage; following Coughlin and Nitzan (1981) only marginal progressive taxes are played by both candidates in equilibrium. If; instead, we adopt Lindbeck and Weibull (1989) probabilistic voting model, the equilibrium tax schedule will be progressive as long as the political power of the rich voter is sufficiently small. The degree of progressivity decreases with population polarization.Political economy, progressive taxation, elastic labor supply.